Havells: Good Beginning to FY19 Should Excite Investors

Strong show in core operations, traction in Lloyd's business can drive 20-25 per cent annual growth in earnings in next two years

Havells has started the financial year on a strong note clocking 40 per cent revenue growth during the June quarter. This was primarily led by its electrical consumer durables (ECD) segment while the Lloyd's air-conditioners (AC) business also surprised positively and other segments too supported.
The Lloyd's business (acquisition completed in May 2017) grew by 14 per cent on a like-to-like basis. The double digit growth in the segment in a quarter affected by unseasonal rains and thunderstorms, was primarily due to 4-5 per cent volume growth and 5-6 per cent price hikes. A stronger share in inverter segment, too, helped. However, there was a decline in margins sequentially, owing to adverse forex movement. Analysts nevertheless remain positive on the Lloyd's segment given the upcoming AC manufacturing plant and tie-up with modern retail stores, which will help the company re-position the Lloyd’s portfolio as well as push up margins.

Adjusting for the AC business of Lloyd, the revenue growth of 19 per cent still remained commendable. The ECD segment contributing close to a fifth to overall revenues, and has been a consistent growth driver. It clocked 33 per cent growth (43 per cent adjusted for excise duties) in the June quarter. Havells continued to gain market share in fans, which has reached 15 per cent (40 per cent in premium segment) that bodes well for its margins too.

Though last year's low base, which was impacted by GST led destocking, also helped, the 18 per cent growth in cables segment (29 per cent of revenue) remained strong. Moving forward, the street is looking to consistent growth in this segment, which will be a sign of organised sector gaining over unorganised players post GST implementation. Further, the switchgears' segment (15 per cent of revenue) too grew by a good 19 per cent. It needs to be seen if the trend sustains, given the overall slackness in new construction and real estate activities in the past.

The only segment that saw lower than expected sales was lighting and fixtures. Havells said that it was mainly due to decline in EESL (government) business, which is lumpy in nature while there is also a conscious decision by the company to limit its exposure to the same. Nevertheless, excluding EESL, the lighting and fixtures segment growth was pegged at 25 per cent, as per the company’s presentation.

On the operating profit margin front, these improved to 13.5 per cent (excluding Lloyd) and 12.4 per cent (overall) compared to 10 per cent and 9.3 per cent, respectively in the year-ago quarter. This was primarily driven by ECD and cables segment. Net profit, thus grew 73 per cent year-on-year.

Analysts remain positive on the company’s future prospects led by ECD segment as disruptions led by note ban and GST implementation during FY18 are now behind, while Havells is now also benefitting due to a shift from unorganised to organised sector post GST implementation. Naveen Trivedi at HDFC Securities says, "We are optimistic about Havells business growth, owing to improving consumption dynamics along with superior execution capabilities (quick turnaround in Lloyd)." Analysts expects a compounded annual growth rate of 20-25 per cent in net profit during next two years. Analysts such as Arafat Saiyed at Reliance Securities value Havells at 30x FY20 earnings, with a target price of Rs 650. The stock closed at Rs 560 on Friday.

Reference - https://www.business-standard.com/article/companies/havells-good-beginning-to-fy19-should-excite-investors-118072300047_1.html